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Saturday, October 4, 2008

Analyst's stocks picks:NTPC-CAIRN-LANCO INFRA-JINDAL STEEL


NTPC
CMP: RS 171.85

TARGET PRICE: RS 208
GOLDMAN Sachs Research has initiated coverage on the stock with a ‘buy’rating, saying NTPC’s business model entails a high degree of earnings visibility with core business consistently yielding 20% plus return on equity (RoE). “NTPC scores well as a defensive growth option. It has the lowest risk to funding amongst its peers, competitive cost of generation, RBI guarantee for payment realisation from its customers (financially-constrained SEBs) up to FY2016 and inexpensive valuations,” said Goldman Sachs Research in a note to its clients.

The firm expects the company’s net profit to grow at a compounded annual rate of 7.3% between FY2008 and FY2011E (estimated) on the back of a 30% growth in wholly-owned commercial generation capacity over this period. “Net income growth would rise progressively over the next three years, as we expect around 45% of the 7,760MW of commercial capacity addition over this period only in FY2011E,” the note said.

CAIRN INDIA
CMP: RS 196.50

TARGET PRICE: RS 276
Macquarie Research has reaffirmed its ‘outperform’ rating on the stock, but has cut the target price by 1.4% to Rs 276 due to the change in 2008 West Texas Intermediate (WTI) forecast. “We have revised down the WTI crude oil price forecast by 6.3% for 2008. Our new forecast has the 2008 figure adjusted down to reflect the recent weakness in prices and the risk that slowing demand growth keeps prices in a range of $100-110/bbl (blue barrel),” said Macquarie in a note to its clients. The firm has cut CY08E profit-after tax for the company by 7% and increased CY09E PAT by 1.8% after factoring in new crude oil price assumptions and INR/USD exchange rates. According to Macquarie, Cairn plans to use enhanced oil-recovery (EOR) techniques at its Rajasthan fields.

“If successful, EOR may increase the recovery factor by 10-20%, or P2 reserves, by 309m barrels of oil equivalent(BOE) compared with 794m BOE currently, thus extending the production plateau,” the Macquarie note said. “Cairn plans to drill 15 exploratory wells in CY08, most of them in the second half. We have assigned a premium of Rs 50 per share (around 18% of equity value) to Cairn’s strong track record in striking oil,” the note added.

LANCO INFRATECH
CMP: RS 178.60

TARGET PRICE: RS 250
UBS Securities has upgraded its rating on the stock to ‘buy’from ‘sell’, but has trimmed the price target to Rs 250. The firm has cut its earnings per share(EPS) estimates for the stock by 10%/20%/19% to Rs 19/22.4/33.3 for FY09/10/11E to reflect a slowdown in project execution. It has also made of 10% discount to the power, engineering procurement and construction (EPC) business and infrastructure valuation for the company.

“Around 90% of EPC’s projects are internal, and we believe the future order inflow is thus at risk; we lower our order inflow estimates by 44% for FY09-11E,” said UBS in a note to its clients. “However, the impact on revenues is not substantial in initial years. We have not changed our margin for FY10/11, which we believe is conservative enough,” the note said. According to the firm, the stock is trading at 9.5 times FY09E EPS, which it sees as a good buying opportunity.

JINDAL STEEL & POWER
CMP: RS 1,151.20

TARGET PRICE: RS 1,800
Kotak Institutional Equities has reinitiated coverage on the stock with a ‘buy’ rating, saying the company’s strong backward integration strategy would enable margin protection even in the current scenario of weak steel pricing. It says the company’s power business would get into full swing over the next few quarters, driving earnings growth and overall valuations. JSP’s Bolivia iron ore project, says Kotak is yet to get environmental clearances even after it has been over an year since the deal was signed. It believes that uncertain future outlook of iron ore prices overshadows earning prospects for the company.

“While JSP has a very aggressive volume ramp-up over the next 3-5 years, near-term volume growth remains muted. However, even as near-term pricing outlook remains weak, captive raw material sources ensure the highest margins in the industry globally,” said the Kotak Securities note to clients. Kotak has valued the standalone steel business of JSP at Rs 625 per share based on four times FY2010E EV/EBITDA in line with global steel companies.

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